1.  Risk

• Uncertainty => varying outcomes => risk

• Measuring risk:

a.  Probability

• Likelihood that a given outcome will occur

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b.  Expected value

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c.  Variability

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2.  Preferences toward risk

a.  Expected utility

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b.  Classifying preferences

(1)  Risk averse

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(2)  Risk neutral

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(3)  Risk loving

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c.  More on risk aversion

(1)  Risk premium

• Maximum amount of money that a risk averse person will pay to avoid taking a risk

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(2)  Risk aversion and income

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(3)  Risk aversion and indifference curves

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